Monday, November 22, 2010

Cooling the Hong Kong property market (1)

Last Friday the Hong Kong government announced three measures to cool the overheated Hong Kong property market:

1. reduced the maximum loan to value ratios for mid-range flats. The new LTV ratios will be 60% for properties priced between HK$8 million and HK$12 million. For properties priced at above HK$12 million the maximum LTV will be 50%. This has two effects. The first is that buyers need to come up with much larger deposits. While this will not be an issue for the majority of investors from the PRC who (anecdotally at least) are largely paying cash, it is an issue for those attempting to get on the property ladder for the first time or who are hoping to upgrade their homes. The second effect is that a higher deposit results in a smaller mortgage -both the level of indebtedness and the monthly commitments will fall resulting in reduced risk to both households and banks;

2. a new special stamp duty on properties which are sold within two years of the date of purchase - 15% if sold within 6 months, 10% if sold within 6-18 months and 5% if sold within 18-24 months. Historically, taxes on short term sales have have only one effect - by forcing people to hold for a longer time period, supply falls and prices go up;

3. plans to stabilise the supply of new units at around 20,000 p.a. These are only plans and it remains to be seen whether this is the right number.

The initial reactions have been mixed. Reports of sellers cutting prices and buyers holding off "until the picture becomes clearer" have been widespread. My own take is that the higher deposit requirement will have some impact on mid-range properties as there are reasonable numbers of buyers who will have to save more to pay the higher deposit deposit. A the top end of the market, there should be relatively little impact (if any). The higher stamp duty will obviously make buying and selling within two years unrealistic and reduce both demand and supply.

As a long term real estate investor, I am largely indifferent to the new measures. I don't want to see a bubble occur (because of the inevitable crash and other consequences which follow including an adverse impact on the rental market). Even more, I do not want to see a repeat of the serious policy issues of 1997/8 when the government attempted to significantly increase the supply of new properties and crashed the real estate market.

If the market comes down far enough, I'll consider adding to the portfolio. How much is enough? Good question and one that I don't have a ready answer to.

Also to be considered - if the market does not cool down sufficiently, what other measures can the government take?